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April 13, 2012

The DOJ's Ebook Price Fixing Lawsuit Against Apple and the "Agency Five": An Overview

Unquestionably, the big publishing news of the week was the US Departmentof Justice's lawsuit filing against Apple and five major book publishers--Penguin, Macmillan, Hachette, HarperCollins, and Simon and Schuster--for alleged ebook price fixing.

At the root of the dispute: the agency pricing model for ebooks, which the publishers adopted in 2010. Under the wholesale pricing model that until then had been the norm for both ebooks and print books, publishers sell to intermediaries--such as bookstores or distributors--at a fixed discount off the list price, and the intermediaries are then free to re-sell to consumers at whatever price they choose. Under the agency pricing model, publishers sell directly to consumers via retailer "agents"--such as Amazon or Apple--which get a commission on sales but cannot lower the publisher-set price. The wholesale model allows the retailer to control book prices; the agency model gives that control to the publisher.

The agency model, in other words, completely changes the selling relationship between publishers and retailers in regard to ebooks. This change is invisible to the consumer, but it is felt in the uniformity of ebook prices from retailer to retailer--since they can't discount--and in the unintended consequences of competing pricing models, such as heavily discounted print books selling for less than their non-discounted electronic versions.

The DOJ doesn't have a problem with the agency model as such. What concerned them was the possibility that the publishers--at first among themselves and later with Apple--had colluded on establishing it, as a way not just to gain control of ebook pricing, but of limiting Amazon's perceived dominance of the ebook market, which Amazon had achieved in part by aggressive discounting.

According to the lawsuit, the collusion occurred through a series of meetings, email exchanges, and telephone calls in 2008 and 2009 (GalleyCat has the details of these allegations) and culminated in the introduction of the agency model in early 2010, just ahead of the April debut of the iPad. (You may remember the February 2010 standoff between Amazon and Macmillan, in which Amazon turned off Macmillan's buy buttons in protest of the agency model, but later capitulated and turned them back on.) As a result, the lawsuit alleges, consumers have paid tens of millions of dollars more for ebooks than they otherwise would have.

Three of the five publishers named in the lawsuit--HarperCollins, Hachette, and Simon and Schuster--have agreed to settle. Among other things, the settlement prohibits them from setting consumer prices for the next two years, prevents them from entering into retailer agreements that include Most Favored Nation clauses (i.e., no one can undersell the retailer) for the next five years, and requires them to terminate their contracts with Apple within seven days of signing the settlement. They must also engage in a variety of compliance activities, including appointing an Anti-Trust Compliance Officer. (Helpful overviews of the settlement terms can be found at ShelfAwareness, Wired, and Publishers Weekly.)

The settling publishers have issued statements; they deny liability, and cite their desire to avoid a costly and protracted legal battle as their reason for agreeing to the settlement. Macmillan and Penguin, by contrast, have vowed to fight on. Penguin's John Makinson has issued a statement denying wrongdoing and affirming the agency model as "the one that offers consumers the prospect of an open and competitive market for e-books." Macmillan's John Sargent expressed similar views in an open letter to authors, illustrators, and agents:

When Macmillan changed to the agency model we did so knowing we would make less money on our e book business. We made the change to support an open and competitive market for the future, and it worked. We still believe in that future and we still believe the agency model is the only way to get there.

It is also hard to settle a lawsuit when you know you have done no wrong. The government’s charge is that Macmillan’s CEO colluded with other CEO’s in changing to the agency model. I am Macmillan’s CEO and I made the decision to move Macmillan to the agency model. After days of thought and worry, I made the decision on January 22nd, 2010 a little after 4:00 AM, on an exercise bike in my basement. It remains the loneliest decision I have ever made, and I see no reason to go back on it now.

Will the settlement actually benefit consumers, as the DOJ claims? It's far too early to predict, but that isn't stopping people from trying. Many of the expressionsofdismay that greeted the settlement cite fears of less choice and competition, as the level playing field created by uniform pricing is dismantled, and Amazon continues to consolidate its already commanding dominance of the ebook market. Other commenters disagree, with familiar criticism of the publishing industry.

Amazon has already announced plans to lower ebook prices. It's important to note, though, that the agency model itself has not been invalidated. While the three settling publishers have agreed to give it up, the two non-settling publishers--plus Random House, which adopted the agency model much later than the other five and wasn't named in the lawsuit--will continue using it, at least for the moment. So in the short term, only some prices will drop. (Ebook aggregator Smashwords, which distributes 40,000 small presses and self-published authors, will also retain the agency model; Smashwords' Mark Coker explains why in a long and interesting article that posits that ebook prices have actually fallen--not risen--under the agency model.)

Over time, the biggest losers here will be the authors. The independent authors will feel the pain first. Agency pricing creates a zone of pricing they can occupy without much competition from branded merchandise. When the known authors are only available at $9.99 and up, the fledgling at $0.99-$2.99 looks very attractive and worth a try. Ending agency will have the “desired” effect of bringing all ebook prices down. As the big book prices are reduced, the ability of the unknowns to use price as a discovery tool will diminish as well. In the short run, it will be the independent authors who will pay the biggest price of all.

13 comments
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The conspiracy to fix prices is perhaps one of the biggest scams of all in the publishing world. It is meant to direct consumers to continue to support a dying print product industry, which is a total shame. Publishers who can't figure out a way to adapt and survive will instead hurt their customers through collusion. It's sad to see, but it's what we have here. At least the federal government is doing something about it. Now, will justice prevail?

MacMillan was the first to push for Amazon to use the Agency Model, so they could possibly make a claim that they did it first, and everyone else copied them. No idea if that will hold up in court, though.

As for Apple, they can afford to fight the case. I've heard a figure of it potentially costing them up to $200 million . . . a tiny fraction of their multi-billion dollar cash reserve.

Excellent wrap-up of a very confusing topic. In my opinion, as things look now the big losers in this settlement will be readers. People who love good books and expect publishers to find, vet and promote them. The spin in the general marketplace (and certainly much of the intertweets) is very anti-publisher (heard just this morning in the gym about the "price-fixing" nasty book publishers were trying to pull). But folks are forgetting: if publishers can no longer charge enough to pay for the cost of professionally discovering, vetting, editing, designing and promoting a given book, publishers will go away. It's not the self-publishers who will feel this blow the most deeply, Mr. Shatzkin, it's the neighborhood book club trying to find the next great book to read. It's authors who don't wish to be publishers but do wish to find an audience. People buy e-readers to read traditionally-published bestsellers, generally well-edited and chosen, and written by authors whose careers have built over time. Not always, of course, but generally. Remember THE HUNGER GAMES was not Ms. Collins first, or second, or third work. If Amazon drives prices down too low for traditional publishers to vet and curate authors, all books, good, bad and otherwise, may disappear in the noise. Of course something else will happen--good books will out, and discovery tools will evolve. Still, it worries me.

Maybe I've got this wrong, but I assume that even under the wholesale model the publishers set the price they are willing to sell their books to the intermediaries for. This means that they can still control their profits to cover the costs Jody mentioned while still allowing the retailers power over the price they charge consumers. This still allows for competition between retailers, even to the point of books being sold at a loss if the retailer chooses to do so. The publishers can even continue to set a "standard" price by selling them directly to consumers at their suggested price.

I have a tough time seeing how this could work out poorly for anyone involved.

I don't understand it totally, but I do know I won't buy anything from Amazon ever again. I may use them to find what I'm looking for - but I'll go elsewhere to purchase. One small step against monopoly.

Anton, but surely Amazon (for example) doesn't buy anything "from" the publisher in the case of ebooks? Amazon sells the ebooks for the publisher (or author, in the case of kdp).

Therefore I'm very confused how this all works - how can it be ok for eg Amazon to decide a price to sell at when it has paid nothing for the product? Clearly I'm missing something major.

As well as being a published author, I publish and sell ebooks through the normal ebook channels, including Anazon. How is a situation possible where I have zero control over my pricing and revenue at any stage? This would be unparalleled in any other industry. The producer must have some say in the price he sets.

I really do feel I must have completely missed something and I'm waiting for someone to tell me to crawl back into a dark place until my migraine goes!

Nicola, the producer does have a say. The question is who is deciding.

If each producer is deciding what they want to sell a product for (and an ebook is a product), then that's fine.

What they did is in two parts:

1. First, the publishers are alleged to have gotten together to agree to a) sell all ebooks for nothing less than $9.99, AND

2. Get the retailer to agree not to sell the book FOR LESS THAN THAT PRICE.

So, if Amazon wanted to sell my "Writers Gone Wild" (from Penguin) as a "loss leader" price of $5.99, they would not be allowed to unless the publisher agreed to lower the price, and that price would be carried by all the other eBook outlets. (So in the end, Amazon would not gain the temporary advantage by offering WGW as a loss leader).

In the end, this is all about economics. If one publisher insisted on the agency model, selling Stephen King's books for $9.99, they would make more money per sale, but lose more over the long run because another publisher would offer their books under the usual terms, letting the retailer set the price. Say, they have Dean Koontz and his books might sell for $4.99 or $5.99.

Stephen King would sell a lot to his fans, just as Dean Koontz would. But a reader who is not as invested in those authors might go to Amazon, see King's latest at $9.99 and Koontz's latest at $5.99 and, well, what do you think will happen?

Nothing good can come from DoJ sticking their ignorant noses into this. If the government prevails, they will limit choice, access, and authors' profits. This is a calculated power play that does nothing to improve the economic circumstances of publishers or Apple. As a result, consumers will suffer. God, I'm so infernally tired of this administration acting likes statist dolts. Not that they know any other way.

Wow, the DOJ is sueing every big name in the publishing industry except Amazon... Something tells me they're not entirely impartial -- that, or they're scared they're wrong and Amazon's lawyers are better at making the suit blow up in their face.

I had an email exchange with Mark Coker himself about this, and he's so misguided and planted firmly in Apple's camp that he has resorted to using a thoroughly misleading dataset to make his argument for agency (and, by extension, Apple and big publishing).

His argument that prices have fallen under agency pricing is accurate, but only on Smashwords. His data is culled from Smashwords only, and big publishers don't use it. Indie publishers who go through Smashwords have dropped their prices, but, under agency, big publishing houses upped their prices from $3-5/book overnight.

The shorthand is this: the agency model in the hands of indie authors results in lower book prices. In the hands of publishers, it results in much higher prices, and that is indisputable.

>As a result, consumers will suffer. God, I'm so infernally tired of this administration acting likes statist dolts. Not that they know any other way.<

Not to mention it's the Consumers tax dollars hard at work to do so. Just so ridiculous. While Amazon works to corner the selling market, drive small bookstores out of business, hold publishers up for a larger percentage of sales, they remain untouched. I'm actually impressed by the 2 remaining publishers that are not backing off/admitting they were wrong. It may be a hopeless cause, fighting the DOJ but then again, I think Apple can afford a decent team of lawyers :)